Should I Buy Centrica Plc?

With summer drawing to a close, investors in Centrica plc (LON: CNA) will be looking forward to another cold winter, says Harvey Jones.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I am out shopping for shares again. Should I add Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US)  to my basket?

When I took Centrica’s temperature last November, it was in robust health. It wasn’t quite bouncy enough for me to buy it, however, and I labelled it “a sparky hold rather than a sizzling buy”. Should I buy today?

Life’s a gas

I underestimated Centrica, which owns British Gas. Its share price is up 20% since then, almost double the 11% rise in the FTSE 100 over the same period. Over five years, it is up 37%, against 15% for the index. Last November, I said a cold winter would be good news for the share price, and that’s exactly what we got, boosting gas consumption and company earnings. We also got plenty of political controversy, as utility bills went through the roof, while customer wages remained stuck in the basement.

Interim first-half results for 2013 were certainly sparky, with group revenue up 14% to £13.7bn, and adjusted group earnings up 2% to £767 million year-on-year. British Gas residential operating profit was marginally higher, “with significantly higher environmental and commodity costs offsetting the impact of increased consumption due to prolonged cold weather”.

Chief executive Sam Laidlaw is in the unusual position of being reluctant to crow about company profits, because he knows how badly that  plays with consumers, journalists and regulators. So his comments include caring guff about “doing everything we can to help [customers] keep their energy costs under control”, while dishing out the shareholder-friendly pledges about growing the business and securing future energy supplies.

Buying spree

Centrica has been investing heavily, buying a gas supplier in the US here, acquiring a part share in a shale exploration licence there, and installing one million smart meters all over the place. It also saw its effective tax rate rise and 43% to a pretty steep 47%. On the plus side, its international gas and oil portfolio is on course to deliver a 20% production boost this year, there is operational progress upstream, and 2013 earnings growth is “in line with expectations”.

Investors will be satisfied with a 6% hike in the interim dividend to 4.92p per share, and Centrica has bought back more than £240 million of shares this year, as part of its £500 million buyback programme.

Despite its respectable growth rates, many investors buy Centrica for its yield. Currently, they get a decent 4.2%, covered 1.7 times, slightly below the average 4.4% yield for the gas, water and multiutilities sector. That is outshined by National Grid (LSE: NG) (NYSE: NGG.US), however, which yields a juicy 5.52%. Yet Centrica has the higher valuation, trading at 14.3 times earnings, against National Grid’s 13.2 times. 

True Grid

Centrica’s forecast earnings per share (EPS) growth is modest at 3% this calendar year and 7% next, which should take the yield to 4.7% by December 2014 (by which time National Grid is forecast to yield 5.7%). I still say Centrica is a good stock to hold, but I would buy National Grid first. That said, I’ve underestimated Centrica before. Roll on winter.

Centrica is good, but it isn’t good enough to feature in our special report 5 Shares To Retire On. This free report by Motley Fool share analysts names five FTSE 100 favourites to secure your retirement. To find out more, download this report now. It won’t cost you a penny, so click here 

> Harvey doesn’t own shares in any company mentioned in this article.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »